Michael Giberson
On June 23 the International Energy Agency announced the release of 60 million barrels of oil from strategic reserves held by member governments. Oil prices dipped for a day or two, then recovered more or less to pre-June 23 levels. Overall, it seems, the release merited a collective yawn from the markets.
The following is a somewhat rambling survey of the post-SPR announcement commentary.
According to the IEA press release, the purpose of the release was to respond to “the ongoing disruption of supplies from Libya.” Given that oil prices were already on their way down in the weeks just prior to the IEA announcement, it isn’t clear that the dropoff of Libyan exports remained a real problem.
In the United States, the announcement triggered an immediate round of political peacockery. Democrats and leftist-interventionists crowed that the release of oil was a “clear message … sent to OPEC, Big Oil, and speculators who have been wreaking havoc with American consumers” (in the words of Rep. Ed Markey) that enough is enough. The Sierra Club’s Carl Pope spouted some nonsense about pricking speculative bubbles in the oil market” and taking volatility out of the market. Peak oilers Jan Mueller and Art Berman call it a “bold, price suppressing ‘poke in OPEC’s eye'” and said “Oil prices are likely to be suppressed until the market digests the changed conditions created by the IEA action.” (The nearby chart from The Economist suggests it took the market about three or four days to “digest the changed conditions.”)
Republicans and conservatives tended to complain about an administration attempt to manipulate oil prices for political gains. Former GOP Rep. Bob Beauprez charged the Obama administration action was a re-election minded move that is “creating a national security vulnerability by draining the SPR in exchange for a few cents of relief at the pump.” A letter sent by GOP lawmakers to the President was less direct, only implying that the administration was tapping the reserve to manipulate the price of oil.
Most of these responses popped up in the days immediately after the announcement. Yesterday at The Economist‘s Free Exchange blog, with the benefit of a bit more market reaction, they observed if the motivations for the release were to push down prices and punish speculators then it may have already failed. (See chart above from the Free Exchange post.) Indeed, rather than punish speculators, if the release signals the injection of more-politicized management of the SPR then it just gives speculators one more angle on which to play the market.
Craig Pirrong explores this angle in a long post at Streetwise Professor, suggesting that politicized management of the SPR will at the margin tend to discourage private holdings of oil. Note that smaller inventories will, other things being equal, lead to greater rather than lesser price volatility. Pirrong has additional comments here and here.
James Hamilton, Econbrowser, explains some oil market dynamics in the course of suggesting the SPR release may depress oil prices a little over a several months.
Cato Institute analysts Jerry Taylor and Peter Van Doren had a piece at Forbes.com under the title, “Obama was right about the SPR release,” though reading the column leaves the impression that they think Obama was right for the wrong reasons. They want to drain the SPR not “in exchange for a few cents of relief at the pump” or to send “clear messages” to OPEC, et al., but rather to drain it entirely and get the government out of the strategic oil stockpiling business.
I’m in favor. The recent announcement of a release marks only the third time that the SRP has been drawn down – the other two times were in 1991 during Operation Desert Storm and in 2005 after Hurricane Katrina. But we’ve had other oil market disruptions of similar size without releases from the SPR, and we’ve managed to survive them. Remember the Oil Strike in Venezuela of the Winter of 2002/2003? It resulted in about the same drop in world oil production as the Libyan conflict, but oil markets swallowed up the disruption with barely a hiccup and not strategic reserve releases. Hurricanes Gustav and Ike caused some serious damage in the Gulf, and a few weeks of higher gasoline prices in the eastern United States due more to infrastructure damage than reduced supply, but the industry recovered and prices resumed falling.
As Taylor and Van Doren explain, “there will never be a ‘supply emergency’ as long as markets are allowed to allocate crude oil via freely functioning prices. As long as you’re willing to pay the market price for crude, you can have all you like.” (Even during the 1973 oil embargo, the most visible consequences of the “oil shock” were likely the results of President Nixon’s domestic economic policies which hampered oil distribution and not the embargo per se.)
We’ve used the SPR a few times, we haven’t used it in similar conditions a few other times, and with or without it the market disruptions are relatively modest. So if it is a tool of no real consequence, why do we bother? The U.S. Department of Defense should maintain whatever reserves judged reasonable and proper for it to carry out its defensive responsibilities, and otherwise the government should get out of the strategic petroleum reserve business.